Shared Services Outlook: Is it Really Worth the Effort?
The pressures on accounts payable organisations to reduce costs, strengthen internal controls and improve service to internal customers show no signs of abating. For many, these seemingly opposing demands have been major catalysts behind the adoption of alternative operational models, including shared service centres (SSCs). But some SSC implementations have been more successful than others, leading some that are considering a SSC to question whether the benefits are achievable and worth the effort. The answer is a definitive yes. Given the cost-reduction opportunity and numerous other benefits, such as efficiency, improved controls and visibility, SSCs are absolutely necessary. But organisations need to be well aware of the complexity of the endeavour, and no one should embark upon a shared services initiative without a full understanding of the work involved and the critical success factors. That said, the scope of the work is more than offset by the dividends of a successful, well-implemented SSC.
The ongoing drive to reduce finance costs is fuelled by the belief that there are significant savings to be achieved. The Hackett Group, a strategic advisory firm specialising in best practice research, benchmarking, and business transformation services that enable world-class performance across selling, general & administrative (SG&A) and supply chain activities, confirms that belief. The firm found that world-class finance organisations continue to differentiate themselves from their peers when finance cost as a percentage of revenue is evaluated. Its 2007 research showed that while peer group companies’ finance costs are 1.24% of revenue, world-class organisations’ finance costs are 0.61% – less than half. The disparity between the groups’ respective costs makes clear that there are cost savings opportunities.
Numerous corporations have charged off in pursuit of the promised benefits of SSCs in their quest to become ‘high-performing’ or ‘world-class’, but many have met with mixed results. Some have succeeded in significantly transforming their companies and practices. Still others have found the promised goals elusive and have encountered many of the known pitfalls – from unsuccessfully trying to scale dysfunctional, manual, paper-based processes to trying to manage multiple financial systems where there is no single source of the ‘financial truth’.Those organisations have either adopted the wrong enabling technologies, encountered insurmountable organisational objections, or they may have completely underestimated what’s involved in designing and implementing efficient processes that leverage the correct technologies. The failure to succeed, regardless of the cause, means that those organisations aren’t able to meet their original goals.
While SSCs represent the ‘brass ring’ of efficiency and are consistently identified as an attribute of high-performing organisations with exemplary controls and cost structures, the question is how to achieve the benefits without getting derailed by the challenges that accompany organisational and technical transformations. Embracing best practices from the project’s inception is instrumental in ensuring success.
Serving a region, business unit or the entire corporation, the SSC replaces decentralised divisional finance staffing models (each with its own processes and systems) with a centralised operation – a single set of streamlined processes and a single technology foundation. It standardises and consolidates the way services are delivered to the business units to achieve maximum efficiency and effectiveness, allowing for economies of scale, improved controls, lower costs, centralised staff knowledge and more. The ideal SSC acts as a high-performing, stand-alone business serving internal customers with competitive costs, quality and efficiencies. Simply extracting finance staff from the operating units they serve and co-locating staff performing similar functions does not create a successful SSC.
A large technology manufacturing company with a global SSC in India embodies many best practices and has reaped significant benefits. Prior to embarking on an AP SSC project, the company processed more than 60,000 invoices/year with an average backlog of 8-9 days and just under 50% of the process automated. At that time, their average cost per invoice was less than US$5 each (an already low figure). The first step in developing the SSC involved establishing the technology foundation and best practice AP processes which could be used in the shared-services environment (the project sponsors were clear that manual processes would not be a viable foundation for a SSC, either onshore or offshore). The global SSC in India was feasible and successful due to automation and process standardisation, as well as other elements that were instrumental in minimising turnover (a major issue in offshore locations), including maintaining local time, frequent communications, and both local and global P2P team meetings. With the global SSC up and running, the AP organisation now processes over 400,000 invoices per year with a backlog of 2-3 days and a cost per invoice of under US$2 – the benefits of having nearly 90% of all processes automated.
The successful transformation from a department-based finance model to a high-performing SSC involved the convergence of multiple organisational and technical elements. Organisationally, unwavering senior management sponsorship and strong departmental management, necessary staffing, a shared commitment to success, and frequent communications bolstered the process across all levels. From a technology perspective, the organisation carefully evaluated its needs and the possible solutions in the marketplace, including outsourcing, and invested in a solution that would become the basis for standardised, best practice processes, and that leveraged its ERP.
Navigating the logistical and cultural challenges to create a sustainable SSC and adopting the practices to make it successful are major hurdles for any large organisation. In its ‘2007 Finance Shared Services Performance Study’, The Hackett Group found that the critical success factors in setting up a SSC are:
The greatest risks, it found, were lack of business unit support, poor service quality, IT problems, failure to transition work effectively, lack of decision-making authority on the service delivery platform, business activities being interrupted during implementation, and lack of employee support.
These findings coincide with the views of Phil Searle, a former chief finance officer of Cendant Travel Distribution Services, International Markets, and a recognised expert on shared service implementations. He stated: “Shared services is a major change that can drive dramatic benefits – reduced costs, better services, improved quality, speed and accuracy of data, and a tighter enterprise-wide control environment. However, to succeed in a shared services initiative, organisations must fully understand the risks and opportunities associated with the project.” Searle’s critical success factors mirror The Hackett Group’s, but are organised graphically into four key areas: customers, processes, people and technology, as the diagram (below) illustrates.
In all cases, the experts agree that effective executive leadership and execution are the most fundamental ingredients for SSC success, and need to be coupled with best practices – simplified, standardised processes and technology leverage. A SSC’s processes must be standardised, consistent and streamlined. As the SSC goes live, the processes must be able to handle the consolidated volumes of transactions which may reach thousands of invoices per day, adding up to hundreds of thousands of transactions per year. Furthermore, the staff must be able support large internal user communities and a large external supplier base with as many as tens of thousands of users per installation and thousands of suppliers. Without exception, dysfunctional, unnecessarily complex, manual, and/or paper-based processes do not scale to the levels required by a shared services operation; they are a major impediment when deployed to the extended enterprise and undermine the SSC’s potential for success.
Effective AP SSC processes are fully automated, streamlined and address the complete transaction lifecycle, from invoice receipt to vendor payment. It’s critical that they be built upon an underlying technology platform that is proven, scalable and robust enough to support large user communities, large transaction volumes and large document volumes, and that they are tightly integrated with the organisation’s ERP financials. Enabling technologies to consider for an AP SSC include: document imaging (with archive and retrieval abilities), workflow, electronic data interface (EDI), optical character recognition (OCR), e-invoicing, e-payment, automated remittance advices, evaluated receipt settlement (ERS), vendor managed inventory (VMI), self-service capabilities, and monitoring and reporting tools.
One aspect of SSCs that many organisations focus on is the location – whether it should be at corporate headquarters, onshore or offshore. There is no one single solution for all, and many have found, depending on the size and range of geographies in which they operate, that a hybrid model works well with a central, headquarters-based SSC, complimented by an offshore counterpart, either to serve another region or for the cost benefits. If there is to be an offshore SSC, critical elements for its success are standardisation and communication.
The advance guard among financial SSCs have overcome the initial set-up hurdles and are now operating with increasing levels of efficiency. As they seek to further enhance their value proposition, many SSCs are expanding their reach to more of the globe, while others are deepening their analytical abilities and looking for opportunities to grow in other ways that positively impact the corporation’s bottom line. These leaders, and how they rise to meet the business challenges ahead, will define future SSC evolution.